GAMBLING, INSURING, AND THE PRODUCTION FUNCTION

A nonlinear production function can cause gambling or insuring in a risk situation. This result holds independently of the shape of the utility function for income. When a random variable enters an entrepreneur's production function with diminishing returns, profit maximization behavior can be likened to in. suring. When the random variable enters with increasing returns, the behavior can be likened to gambling. Gambling and insuring do not necessarily depend on preferences and values; they may reflect rational adaptations to different environments.